Is Geithner's Wall Street bailout running out of gas?
by bobswern, Sun Feb 15, 2009 at 09:59:13 PM EST
While Treasury Secretary Geithner doesn't seem to be getting it, many others are.
As recently as today, U.S. Treasury Secretary Tim Geithner continues to make pronouncements of a "private-public partnership" (his vision for the follow-up proposal on TARP I, originally implemented by the Bush administration in the fourth quarter of '08) which will, effectively, expand the $350 billion, second portion of former Treasury Secretary Henry Paulson's Wall Street bailout program to $2 trillion: "Geithner Reassures G-7 on U.S. Financial Rescue Plan."
But are we already encountering problems selling our government debt to underwrite this?
In his still-vague proposals, Geithner supports pouring an additional two trillion dollars in taxpayer funds to "stabilize" our nation's financial services sector and to get the credit markets flowing, once again. This assumes our government is even able to finance that debt with the sale of T-bills and bonds, etc. And, contrary to popular belief and the reality that the U.S. may just print money without any adverse consequences, we're already quickly learning--the hard way--that there's a limited market for our nation's unbridled debt, "Treasuries Drop as Dealers Digest $67 Billion in Notes, Bonds."
We have a record-breaking schedule of federal t-bill and bond offerings slated through 2009, supposedly to finance all of this, and it appears there already may be problems with this planned schedule, and it's only February. (Basic concept: these t-bills and bonds aren't exactly flying off the shelves.) Already, we're beginning to create a significant "overhang" with regards to unsold federal T-bill offerings, set to the tune of $2.5 trillion, throughout 2009. And, we're less than seven weeks into the year.
Primary dealers' shares of two of the U.S. securities that were sold slipped amid the steady increase in supply, Bloomberg data showed. They purchased 54.1 percent of the three-year notes, compared with an average of 81.6 percent at auctions of the security over the past three years, and 49.6 percent of the 30- year bonds, compared with an average of 68.2 percent at auctions since February 2006.
"The market continues to adjust because of the supply we got," said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 16 primary dealers that trade with the Federal Reserve and are required to bid in Treasury auctions. "There is still supply overhang from the $67 billion, and a recognition that there will be more supply in two weeks, and two weeks later, we'll get more again."
The U.S. will probably borrow $2.5 trillion during the fiscal year ending Sept. 30 as the budget deficit swells amid programs to thaw credit markets and revive the economy, according to primary dealer Goldman Sachs Group Inc. That's almost triple the $892 billion in notes and bonds the government sold in the prior 12 months.
Is a consensus developing about all of this that flies directly in the face of centrist strategy? Or, is centrist strategy, led by Geithner taking the long way home?
A consensus appears to be building, originally from the left and now eminating from the right, to abandon Geithner's "bailout" approach and to utilize proven government infrastructure that's been in place for decades (either directly via the Federal Deposit Insurance Corporation, a/k/a the "FDIC," or something akin to creating a Resolution-Trust-Corporation-like, a/k/a "RTC," entity to dispose of failed bank assets), to temporarily takeover insolvent banks and restructure them and/or sell off their assets, at little or no financial exposure to the public.
Progressive economic stalwart, Paul Krugman, for one, expresses tremendous concern about all of this, due to a combination of: i.) a lack of willingness on the part of the legislative branch--Democrats and Republicans alike--of our government to support Geithner's proposed efforts and ii.) the unmentioned reality that we may have problems (we may be experiencing these problems, already, in fact) raising even the next $2.5 trillion in publicly-financed debt needed to accomplish this. In short, for multiple reasons, the government simply may not be able to go back to the proverbial money tree and obtain the funds necessary to accomplish Geithner's flawed strategy (in Krugman's eyes, and those of a now-building consensus from both the left and right here in the U.S.), per Krugman's most recent commentary, "Failure to Rise," which explains his concerns in greater detail.
And, for those folks "concerned" about all those trillions of dollars in credit default swaps ("CDS") further entangling us in this mess, referencing the "too big to fail" meme, here's NY Times columnist Gretchen Morgenson's commentary on a great set of ideas to safely unravel that tangential market: "Time to Unravel the Knot of Credit-Default Swaps," as we simultaneously bring sanity back to our financial services sector, too!
At this point, it's not much of a stretch to say that there now appears to be a larger and larger group formulating a consensus aligned with this non-centrist thinking that's growing by the day, too:
"The TARP Dog and Pony Show," by Dean Baker
The basic point is extremely simple. We have a large number of bankrupt banks. We have a public interest in keeping the banks functioning, but we have zero public interest in giving taxpayer dollars to bank shareholders or to the executives that wrecked the banks they ran.
Geithner can design as complex a dog and pony show as he wants, but if his plan takes up hundreds of billions of taxpayer dollars and does not involve wiping out the shareholders and sending the bank executives packing, then he has ripped us off.
"What Went Wrong for Tim Geithner," by Robert Kuttner
Geithner's premise is that banks are not engaging in a variety of lending because they are no longer able to package loans as bonds. So Geithner, using public funds, hopes to restart the engine of loan securitization. In effect, he wants to rebuild the very model that caused the crash, relying on the most unsupervised and speculative part of the system -- hedge funds and private equity. One well-placed official told me, "It's as if his goal is to help Wall Street, not to restore a functioning banking system."
Nobody has figured out how existing toxic assets would be priced; that is one of the many details to be filled in later. But if hedge funds and private-equity companies are to profit -- with government and Federal Reserve guarantees, no less -- it has to be a less efficient and more risky and costly solution than temporary government ownership, if only because it is so much more circuitous, with so many more players who need to take a cut.
By doubling down once more, Geithner is now playing roulette with America's ultimate bank, the Federal Reserve, which stands to take on at least a trillion dollars more in risk, doubling the size of the Fed's own balance sheet. People mistakenly think that the Fed "prints money" without consequences. It does not. The Fed has a balance sheet of assets and liabilities like any other bank.
"Geithner's Plan: It's Not Transparent and It's Still a Bailout," by Robert Reich
Taken as a whole, this is hardly a model of transparency. To date, the Fed has already committed some $2.5 trillion to rescuing the financial system, yet no one outside the Fed knows exactly how or where this money went. The Fed is subject to almost no political oversight. Yet if the trillions of dollars the Fed has already committed and the trillions more it's about to commit can't be recouped, the federal debt explodes and you and I and other taxpayers are left holding the bag.
In other words, Geithner and Fed Chair Ben Bernanke continue to do pretty much what Hank Paulson and Bernanke did: They hide much of the true costs and risks to taxpayers of repairing the banking system. Those risks and costs should be put on the people who made risky bets on the banks in the first place - namely bank shareholders and creditors. Shareholders of the most troubled banks should be wiped out entirely. Bank creditors- except depositors - should take major hits. And top executives who were responsible should be canned. But Geithner and Bernanke don't want to take these steps for fear of spooking the Street. They think it's safer to put the costs and risks on taxpayers -- especially in ways they can't see.
"What Other Financial Crises Tell Us," by Carmen Reinhart and Kenneth Rogoff
Can the U.S. avoid continuing down the deep rut of past financial crises and recessions? At this point, effective policy prescriptions -- such as coming up with realistic costs of the size of the hole in bank balance sheets -- require a sober assessment of where the economy is going.
For far too long, official estimates of the likely trajectory of U.S. growth have been absurdly rosy and always behind the curve, leading to a distinctly underpowered response, particularly in terms of forcing the necessary restructuring of the financial system. Instead, authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership, and only then recapitalizing and reprivatizing them. This is not the time for the U.S. to avoid painful but necessary restructuring by telling ourselves we are different from everyone else.
Play By the Rules, Close Failing Banks," by Reuters columnist James Saft, covering comments made by Joseph Stiglitz
As Nobel prize winning economist Joseph Stiglitz points out, the United States has an existing process to deal with failed banks.
"You have to have a certain amount of capital and if you don't have enough capital you are going to be shut down. We have a legal framework and we should use that legal framework," he said in an interview on Saturday at the World Economic Forum in Davos.
"What you need to do is carve out the narrowest thing that you need to carve out to preserve the payment mechanism. We are engaged in re-writing the rules and the question is: 'For whose benefit?'"
Both bondholders and derivative counterparties -- people who entered into a contract with a bank for payment if certain external things happened, such as the default of a third party -- look to be the big winners in preserving the existing banks.
"Can't Get There From Here," by Progressive pundit Robert Borosage, discussing Financial Times economics writer Martin Wolf's ideas:
Martin Wolf... ...notes that the [Giethner's] plan was constrained by three assumptions: no nationalization, no losses for bondholders, no new money from the Congress.
No nationalization rules out the way the US normally deals with insolvent banks. The FDIC takes them over, replaces the management; the depositors are reassured, the shareholders take their losses to write off the bad debts. Then the FDIC restructures the bank, merges it or sells it back to private investors. It arranges an orderly and seemly burial. Without doing this with banks that are "too big to fail," the administration is left paying tribute to zombie banks that consume taxpayers' money while doing little if any productive banking.
No losses for bondholders means that taxpayers pick up the bill. With an insolvent bank, shareholders lose their investment. That's how the market works. If that isn't enough to cover the losses, then creditors take what is called "a haircut." A portion of the loan they made to the bank is written off or turned into equity (stock). But with neither the shareholders nor the creditors taking the hit, only taxpayers are left.
No new money from the Congress -- surely a political reality with the rising popular fury at bailing out millionaire bankers -- means that the plan is immensely complicated, combining guarantees from the Federal Reserve, small capital injections, inducements to lure private investors. But the whole point of the exercise is to restore confidence in the soundness of the banks. A jerry--built complicated package only makes everyone nervous that the whole contraption won't hold up.
Wolf continues to explain how Obama can get this back on track. And, that's due to Geithner's plan having "the redeeming feature" of a stress test for banks in it, which is also "....the first thing the FDIC does when it takes over a bank verging on collapse. An honest assessment allows the government to decide whether the bank is salvageable or not. "
Wolf continues to explain that 'upon discovery of the bank's insolvency,' Congress would go back to the White House and advise the President and Secretary Geithner to put the bank (that failed to pass the stress test) into temporary federal receivership.
It does not appear, however, that Geithner and the White House are going along this path.
Does 'the long way home' involve spending $2 trillion to support Wall Street?
And that's because Treasury Secretary Geithner would not be recommending two trillion dollars for this effort, unless he fully intended to move forward--as Kuttner references the matter above--taking a 'less efficient and more risky and costly [path] solution than temporary government ownership, if only because it is so much more circuitous, with so many more players who need to take a cut.'
But, as of this evening, we're beginning to see comment from the right indicating a certain level of support for (at least temporary) nationalization, too.
Late today, this appeared in The Hill: "Once radical, nationalization attracts GOP support," which proceeds to inform us of the following which occurred between right wing Senator Lindsey Graham (R-SC) and George Stephanopoulos, on Sunday's "This Week with George Stephanopoulos:"
Graham, a confidant of former Republican presidential nominee Sen. John McCain (Ariz.), said that the problems in the economy and the financial sector are so severe that U.S. policy makers may have to start thinking about things once labeled unthinkable.
"This idea of nationalizing banks is not comfortable," said Graham, appearing downcast. "But I think we have gotten so many toxic assets spread throughout the banking and financial community throughout the world that we're going to have to do something that no one ever envisioned a year ago, no one likes."
So, in their effort to gain support for what may be, inherently, a very flawed concept, to obtain a two trillion dollar Wall Street bailout, we may continue to see the White House and the Treasury Department focusing upon some of the more emotional--but less important from a bottom line reality --matters relating to the bailout now, such as the demands for executive pay caps, and allocating a pathetic $20 or $30 billion for Detroit ($20 or $30 billion to maintain 2.3 million automotive sector jobs, versus the entire $789 billion American Recovery and Reinvestment Act of 2009, a/k/a "the Stimulus," which is being established to create 4 million jobs).
And, while folks at the just concluded G-7 conference [SEE: "Geithner Reassures G-7 on U.S. Financial Rescue Plan,"] may be joining in the White House talking points chorus of how our future (along with 'the lives of 400,000 babies per year') depends upon supporting the bankrupt behemoths of our status quo, such as Citigroup and Bank of America (I haven't figured this one out yet, but if it's what it appears to be, then it's the spin equivalent of hitting below the belt), it would also appear that a growing consensus of liberals and Progressives, along with a few conservatives, may be thinking otherwise.
If I were Treasury Secretary Geithner, I wouldn't count on spending that two trillion on Wall Street just yet. That's because it may be all that's left. And, with legitimate concern that more funds will be needed to stimulate Main Street (not Wall Street) in coming months, the long way home for Mr. Geithner may have just become a little longer. Somewhere along the way, his ideas just may run out of gas.
NOTE: Kudos and a hat tip to fellow MyDD blogger art3 for the pickup on tonight's Lindsey Graham story in his diary: "Real Bipartisanship: Waters and Graham for Nationalizing Banks."
Tags: bank of america, banks, Carmen Reinhart, Citigroup, Dean Baker, depression, Economy, Joseph Stiglitz, Kenneth Rogoff, Martin Wolf, nationalization of banks, Paul Krugman, President Barack Obama, Recession, Robert Kuttner, Robert Reich, US Treasury Secretary Tim Geither (all tags)